Self-employed and working from home? Save tax by claiming working from home expenses!
Updated: Aug 5, 2019
Good news! If you’re one of the UK’s many self-employed workers who carries out work from home, you can claim some of the cost of running your home as a business expense, which will save you tax!
Here’s how to work out how much you can claim……….
What do I actually do from home?
First things first. Don’t forget, working from home includes not only the ‘core’ of your job i.e. production of goods or carrying out the service you provide. It also includes the many hours spent networking online, advertising, researching, updating websites etc. It’s important to remember all of this extra time. You’ll see why below!
Simplified or detailed?
If you work more than 25 hours per month from home and you’re a sole trader or in a partnership with other individuals, then you’re eligible to use the simplified accounting method. As the name suggests, this is the simplest way of calculating how much you can claim by using a flat rate calculation.
Simplified flat rate method
The flat rate method simply asks you to look at how many hours per month you spend running your business from home (remember all those extra hours mentioned above!) and then include a fixed amount in your accounts for business use of home.
The monthly rates are as follows:
· 25-50 hours - £10 per month
· 51-100 hours - £18 per month
· 101 hours or more - £26 per month
If you normally work around 75 hours per month, then you would include in your accounts an allowance of:
£18 per month x 12 months = £216
If the number of hours you work from home varies significantly month to month, then just select the most appropriate rate for each month and then total them up at the end of the year, for example:
3 months x £10 per month = £30
4 months x £26 per month = £104
5 months x £18 per month = £90
Total to include in your accounts - £224
The simplified flat rate method is certainly much quicker than working out actual costs, but the figure may not be as high. Despite this, the flat rate method is still a great way to save tax with a simple calculation. You also don’t need to keep receipts if using this method. Don’t forget that you can still claim, telephone & broadband costs on top of the flat rate work from home cost.
If your business isn’t eligible to use the simplified flat rate method above, or you’d like to calculate your work from home expenses in more detail (and potentially save more tax), this is the method for you.
Fair & reasonable
HMRC state that any claims using this method have to be ‘fair and reasonable’ in splitting your business element from the private element of your home running costs. So, if you’re a virtual PA, you’ll spend most of your day working from home. However, if you’re a painter and decorator you might spend one of two hours per night doing admin and ordering materials. The rest of your time would be out at customer’s premises.
So how do you split the costs to keep the tax man happy?
1 – Total up costs
The first step is to calculate the total running costs of you home for the year. You should include the following costs in this calculation:
· Mortgage interest (only interest, not the capital part)
· Rent paid to a landlord/council
· Electric & Gas
2 - Calculate business usage
One recognised method is to work out how many rooms you have in your home and identify how many of those rooms you use for business.
Then calculate how much time you use each of these rooms for business.
3 – Final Calculation
Say there are 10 rooms in your home. You only use one room for business. 80% of the time that room is used, is for business. Your total home running costs are £6,500 per year. Your calculation would be as follows:
Cost per room - £6,500 / 10 ten rooms = £650 per room.
Business time for that room - £650 x 0.8 = £520
The total to include in your accounts is therefore £520.
Don’t forget you can still claim for Telephone and Broadband costs
To avoid capital tax complications, it's best to keep all rooms in your home mixed purpose. So if you have an office, make sure the kids use it for homework, or your partner works from home in there.
I hope you’ve found this guide helpful, but if you need any further information, just drop us a line at firstname.lastname@example.org on 01636 681181.